The Mosaic Company (MOS)
Fertilizer stocks plummeted on July 30 on the heels of the announcement that Russia’s Uralkali was quitting the Belarusian Potash Company cartel, which prompted investors to fear that potash pricing would plummet due to increased competition. The Mosaic Company (MOS) stock dropped 22%.
My views are the market overreacted on this sudden news (which I defend in this report), and MOS has some real catalysts on the horizon that should drive the stock higher. The high-level list of value-driving items include:
Mosaic (MOS) is the largest producer of phosphate fertilizer and is the second-largest behind Potash Corporation in terms of nameplate capacity in potash. MOS mines phosphate rock in Florida and processes rock into finished phosphate products at facilities in Florida and Louisiana. MOS mines potash in Saskatchewan, New Mexico, and Michigan. The company has other production, blending, or distribution operations in Brazil, China, India, Argentina, and Chile, and a strategic equity investment in a phosphate rock mine in the Bayovar region in Peru.
The company was formed in October 2004 from the combination of the former IMC Global and the fertilizer division of privately-held Cargill Inc.
As described in MOS’s 10-K:
Details on MOS’s FY2013 annual phosphate capacity and production volumes are as follows:
The phosphate market is a global market, with developing countries (specifically China and India) becoming a much larger part of the demand pie. Most market experts expect long-term phosphate demand to trend at a 2.5-3.0% global growth rate.
MOS management outlines a number phosphate market facts, some specific to MOS and others relating to the phosphate market as a whole. The following are, at a high level, the main talking points when it comes to MOS and the phosphate industry:
As described in MOS’s 10-K:
Details on MOS’s FY2013 annual potash capacity as well as finished product production are as follows:
The Market Realist Take
In September 2013, Mosaic cut its quarterly forecast for potash and phosphate sales and prices, as “domestic and international crop nutrient markets have softened in part as a result of the distributors’ cautiousness caused by the Belarusian Potash Company (BPC) break-up.” Potash sales volumes in the third quarter are expected to hit 1.45 million to 1.65 million tons, down from the previous forecast on July 16 of 1.8 million to 2.1 million tons, according to a company statement. Prices are expected to be in the range of $330 to $340 per ton, according to the statement.
Several companies in the potash segment have made similar announcements regarding price and volume cuts due to the BPC breakup. Plus, the strengthening dollar and weakening rupee have led to falling potash demand from India, a major importer. The falling prices have also led to a demand for cuts from the main potash importers, China and India. Since these developments have taken place during a seasonally lean period, distributors can afford to be cautious and are holding off their purchases until the situation improves. However, according to industry experts, the decline in prices is expected to be short-term, and the long-term prospects are still positive. Mosaic’s $7 billion Saudi Arabian joint venture is expected to enhance its growth in the phosphate segment. Also, long-term industry drivers like increasing population—especially in emerging markets—and a declining supply of land for agriculture will lead to demand for higher crop yields. This will favor fertilizer producers.
As Market Realist has recently stated, October inventory will likely remain negative, as few companies are still looking to negotiate and the government shutdown in the United States could have delayed purchases. If inventory growth continues to rise higher for the remainder of this year, potash producers like Potash Corp. (POT), Mosaic (MOS), Agrium Inc. (AGU), and Intrepid Potash, Inc. (IPI) will likely report weak sales for the fourth quarter. This weakness could negatively impact fertilizer prices—a further negative. Revenue and earnings will be negatively affected by lower sales volume. The Market Vectors Agribusiness ETF (MOO) will also be impacted as well if this isn’t priced in.